
§ The Interest Tax Shield with a Target Debt-Equity Ratio
§ Rather than maintain a specific level of debt, many firms target
a specific debt-equity ratio
§ In this case, first compute V
L
and V
U
:
V
L
= PV of free cash flows discounted with the WACC
V
U
= PV of free cash flows discounted with the pretax WACC
§ The value of the interest tax shield is V
L
– V
U